Is superannuation dangerous?

Me on ABC891, April 4

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TONY DELROY: Where's it best to keep your money?

You'd be forgiven for answering "under your bed".

In the year to the end of February the typical super fund made 0.1 per cent.

That's right - next to nothing.

February was a good month. Over the year to January the typical super fund lost 1.45 per cent.

It's happening in part because the funds are following conventional wisdom in investing heavily in shares. Over time they are said to perform better than anything else.

But do they? And are our super funds dangerous?

Our Wednesday economics correspondent Peter Martin joins us to discuss new thinking and an alarm sounded by the former head of the Treasury Ken Henry.

Peter is economics correspondent for The Age and the Sydney Morning Herald and joins us from parliament House in Canberra...


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You're better off with your super in equities, right?

That's the conventional wisdom.

Ken Henry and others think it is dangerous.

At macrobusiness Jackson has run a Monte Carlo simulation.

The results:

The median (50th percentile) super fund does better in equites than it would be in fixed interest.

But the 25th percentile fund is worse in equities than it would have been in fixed interest.

As he says:

"The distribution is far more spread for equities, both to the high and low end. If you’re an optimist, it’s all roses in equities. If you’re a pessimist, or just plain unlucky, then maybe you want to bolster your portfolio with something a little less volatile."

There's more. A typical retiree would be better off ignoring the traditional advice about moving from equities to fixed interest in their last decade of work.


Should the Super Industry Invest More in Fixed Interest - Ken Henry



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Ten predictions guaranteed in 2012

Nathan Bell in The Age:

1. A lot of things will happen that no forecaster thought to include in their predictions for 2012. These events will be the obvious consequences of the current economic and political environment. So obvious, in fact, that they weren’t included in the predictions.

2. Many things won’t happen that forecasters did include in their predictions for 2012. This will be a result of unforeseen circumstances and six sigma events, annual anomalies that crop up one in a million years.

3. A small number of the vast number of predictions about 2012 will randomly come true and the predictors will be proclaimed gurus. This will be despite the fact that it was their 1000thprediction and the first one they got right.

4. All predictions will be adjusted throughout the year so that the forecaster’s final prognostications, announced on Christmas Eve, will be very close to accurate.

5. Those fund managers that outperform for the year will cite their skills, systems, intelligence and uncanny ability to time the market as the reasons for their outperformance. While acknowledging that past returns are no guarantee of future returns, the past returns will be included in advertising materials in very large font.

6. Those that underperform will cite the randomness of markets and that any one bad year will obviously be followed by a good one, because underlying it all they have superior skills...

Continued at The Age.

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The war between traders and economists

Christopher Joye in Business Spectator:

"There is a mostly unknown, subterranean battle of wills that takes place every day between high-profile economists who are paid to divine our future, often many months, or years, in advance, and “traders”, that is, financial market investors, who are reluctantly influenced by their analytical brethren.

I have lots of friends who fall into both camps. If there is one constant amongst traders, it is that they universally hate economists. The typical refrain is that economists (strategists and analysts too) are overpaid astrologists who could not hit a dart-board if it was pinned to their faces.

Economists, frankly, do not have much of a comeback to this criticism, since empirically they know, with some unstated sorrow, that their forecasting records over the long-run are, in truth, no better than the proverbial monkey pegging darts at a target.

Whenever I hear a trader lambast an economist, or the analyst fraternity at large, it has always irritated me, for reasons that I have not previously articulated. It was one of those subliminal push-backs that I get when a part of my brain knows something to be right or wrong, but has yet to thread the thoughts together as to why exactly, and comprehensibly, this might be the case.

These two cohorts do make for fascinating contrasts. As a group, economists and strategists tend to be detail-oriented, thorough, cerebral, well-behaved, and lucid, if not eloquent. Of course, you have some unavoidable genetic dispersion in terms of actual aptitude. Some are especially proficient at making a lot of noise and grabbing attention, but sadly fall short in the underlying horsepower stakes. Others have unusually impressive bandwidth, and would likely be successful at most things they turned their minds to.

The rarest breed of them all is the economist who would make, or has made, an outstanding trader. This is generally someone imbued with an unusual conjunction of qualities: bona fide intellect; the ability to quickly synthesise meaning from disparate information; and, most crucially, the capacity to make rapid, probability-weighted decisions. That is, someone with well-informed conviction. Oh and throw brass balls into the mix. You need to be able to accept and assume 'risk'.

What about traders? Well, pure traders, as opposed to traditional 'investors', are either gamblers or bookmakers..."


Continued at Business Spectator

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The law of small numbers

Today on Life Matters I used the excuse of the grand finals to speak to Rebecca Gorman about what psychologist Amos Tverski calls "The Law of Small Numbers.''

It is an ironic reference. The so-called law of big numbers states correctly that when an experiment such as a coin toss is repeated (say) thousands of times, heads will come up about half the time.

Tverski finds that people wrongly believe this bo be the case for very small numbers as well.

If a couple has two children, both of them girls, people attach significance to this. It must be in the man's genes. Yet this is highly likely (25 per cent) to happen just by chance.

When it comes to runs of heads, they are far more likely than we think. If you toss a coin 20 times, a run of 4 heads in a row (somewhere in the sequence) is extremely likely - the probability of that happening by chance alone is about 50 per cent!

But Tverski thinks that because we are victims of belief in "the law of small numbers" we feel the need to attach significance to a run of four wins in a row.

In sport in the US, this is called belief in "the hot hand". Tverski has shown that for basketball in the US the hot hand seems not to exist. Sone study reports that after a run of successes a certain player had a 75 per cent chance of having another success. After a run of failures the player also had a 75 per cent chance of success.

Neither players nor their supporters believe this.

We seem to have an almost programmed-in need to look for meaning in what might be meaningless noise....

Even the Australian Bureau of statistics publishes trend estimates, some of which are meaningless. I remember in 1993 that the direction of the trend for the current account deficit used to point up in some months, down in others. In reality the underlying movement in the current account deficit probably wasn't changing at all.

Which brings us to the Australian Securities and Investments Commission and its position paper on the advertising of investment returns. ASIC wants the rules governing the advertising of past performance tightened up.

It has commissioned a survey from the Financial Policy Research Centre which examines 100 surveys of the performance of funds managers over time. It says about half of the studies found no correlation at all between good past and future performance. "Good performance seems to, at best, a weak and unreliable predictor of good performance over the longer term."

There are all sorts of reasons why this should be the case. Without knowledge that the market doesn't have (which is illegal in equities) it should be impossible to consistently better predict where the market will end up than the market itself. An investment style which works in one set of market conditions may not work in the next. Successful funds managers will face a run on their staff, everyone will copy them, they will believe their hype. (Remember BT?)

I said on Life Matters that if a firm wins "Funds Manager of the Year" two years in a row, ditching it might be as good advice as keeping it.

Tverski points out that for sport there is no reason why a run of wins shouldn't signal something, it is just that the statistics show that it doesn't.

I must say that I personally found Tverski's findings about perception challenging. Until now I must have believed (subconsciously) that "god's hand" manipulates the outcome of a coin toss to ensure that a run of heads is always followed by a run of tails. I now see (late) that that isn't how it happens. A run of heads isn't reversed by the hand of god, its effect is diluted over time by other results, so that when the number of tosses gets very large the results are about 50-50. (If you toss a coin and get five heads in a row, and then keep tossing until you have tossed 1,000 times in total, probablity theory does not predict that the total number of heads will be 500, it predicts that the number will be about 502.)

Actually I still find the workings of probability hard to get my head around. Perhaps because I know from quantum physics that the hand of god does manipulate the results of wave/particle experiments to give us the result it wants us to see. So maybe our intuitive belief in a hand of god isn't so wrong after all.

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